The Bad News Is The Good News Is Wrong

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All of the official pronouncements accompanying the recent release of the 1998 Trustees' report stressed that "Social Security's long-range projections have improved" since last year's report. This assessment, widely repeated in the media, is giving new ammunition to those who want to defer reform.

In fact, the long-term outlook for Social Security has worsened, not improved. While it is true that the Trustees now project that the Social Security trust funds will be solvent until 2032, three years longer than they did a year ago, this "solvency" says nothing meaningful about the program's fiscal or economic sustainability. What matters is Social Security's operating balance--that is, the annual gap between its tax revenues and expenditures. According to the Trustees, this balance is now due to sink even deeper into the red than it was a year ago.

The Real Bottom Line

As it turns out, the three-year reprieve for Social Security has nothing to do with any favorable revision in the long-term demographic and economic assumptions that determine the program's cost in the next century. In fact, the only revisions affecting Social Security's costs beyond the 2010s are in a negative direction.

Rather, the reprieve is due entirely to a larger projected build-up in the Social Security trust funds. This larger build-up is primarily the result of revisions in the Trustees' near-term economic forecast. With the expansion still chugging along, the Trustees anticipate lower rates of unemployment and inflation and higher rates of real wage growth over the next ten years. These changes extend Social Security's solvency down the road by increasing its near-term operating surplus, and hence its trust-fund balance. In addition, the Trustees anticipate higher real interest rates, which, by increasing the return on trust-fund assets, further extends trust-fund solvency.

So much for the "good news." The bad news is that this extended trust-fund solvency does nothing to ease the burden of Social Security's long-term operating deficit on the budget and the economy come the 2020s and 2030s. To the contrary, the operating deficits now projected by the Trustees are actually slightly larger in every year after 2019 than those projected in last year's report.

As we have often argued in these alerts, it is a program's operating balance, not its trust-fund balance, that measures its true fiscal burden. Trust-fund accounting assumes that operating surpluses constitute genuine savings that can be drawn down to cover operating deficits incurred in future years. But they don't. As soon as annual expenditures exceed annual tax revenues, Congress must cut other spending, raise taxes, or borrow from the public to pay promised benefits. Although it has gone largely unnoticed, the deterioration in Social Security's long-term operating balance--not the much-ballyhooed improvement in its trust-fund balance--is the real bottom line to the Trustees' report.

A Lien on Future Taxpayers

Future historians may someday devote a puzzled footnote to the media reaction to the 1998 Trustees' report. Why, they will wonder, did America congratulate itself in advance for boosting Social Security's trust-fund assets, which constitute nothing but a lien on future taxpayers? And why, they will wonder, did America pay no attention to the fact that the projected annual gap between the program's future revenues and future costs was actually larger than the year before?